Are jobs being created or lost in AFTA?

Romeo A. Reyes, Jakarta

The ASEAN Free Trade Area (AFTA) has been virtually established four years earlier than originally targeted. The average tariff for ASEAN six is now down to 1.5 percent from 12.8 percent when the CEPT agreement was signed in 1992. Tariff on 65 percent of products in the inclusion list has been removed altogether. ASEAN six has committed to remove tariff on all products in the inclusion list by 2010. The new members have also committed to do so by 2015.

As membership of ASEAN expanded to 10, more agreements were signed to liberalize further the product and factor markets. The Bali Concord II was signed on Oct. 7, 2003 declaring the formation of an ASEAN Economic Community (AEC) as a single market and production base.

Guided by the principle of open regionalism, ASEAN has also been negotiating free trade or closer economic cooperation agreements with China, Japan, India, Republic of Korea, Australia and New Zealand, and has begun consultations with the United States and the European Union to lay the foundations for a possible FTA in the future. The most advanced is with China with whom a Comprehensive Economic Cooperation Agreement on Trade in Goods has already been signed and entered into force on Jan. 1, 2005.

The real aim of ASEAN in establishing a free trade area and in building an economic community of ten nations is not so much to promote trade flows among member countries as to enhance the competitiveness of the entire community, and thereby its attractiveness as an investment destination, both from within and more importantly from outside ASEAN.

By removing barriers to the flow of goods, services and factors of production, ASEAN would become a single market of half a billion consumers and a production base with a correspondingly huge number of workers and production input suppliers. Economic integration through product and factor market liberalization would help reduce the cost of doing business in the community, enable firms to realize economies of scale, attract domestic and foreign investment, promote economic growth, and create jobs. That is the premise. What has actually been happening? Are jobs being created or lost in AFTA?

Studies on labor and employment implications of AFTA conducted in four ASEAN countries, including Indonesia and the Philippines, along with a regional overview, yielded a number of interesting results. They were presented at a special workshop earlier this month in Cambodia in conjunction with the ASEAN Senior Labor Officials Meeting (SLOM).

ASEAN Secretariat data shows that total ASEAN exports (excluding Lao PDR and Vietnam) grew by 12 percent and imports by 10 percent from 2002 to 2003 (when AFTA was virtually established). Intra-ASEAN exports increased even faster for the same period at 15 percent, reaching almost US$100 billion in 2003.

But since 1993, when the process of trade liberalization under AFTA started, but long before it was virtually established with a tariff range of 0-5 percent, intra-ASEAN exports of ASEAN 6 had been increasing. Except for a brief disruption during the economic crisis in 1997-1998, it was growing at an average annual rate of 11 percent. One might ask then whether recorded increases in intra-ASEAN exports would have happened even without trade liberalization under AFTA.

While ASEAN intra-regional trade has been increasing, it is important to note that its share to total trade is still significantly smaller than that of EU and NAFTA: ASEAN's share in 2002 was only 23 percent compared to 67 and 56 percent for EU and NAFTA, respectively. This suggests that the extent of ASEAN integration in terms of trade flows is still relatively shallow.

With respect to FDI inflows to ASEAN, a dramatic increase of 46 percent was registered from $13.8 billion in 2002 to $20.2 billion in 2003, in the face of declining global FDI flows since 2000, and notwithstanding perceived threats in the region such as terrorism and SARS. However, review of foreign investment flows into ASEAN in earlier years would reveal that the trend was quite erratic, reaching a peak of $34 billion in 1997. The annual average of $28 billion for the period 1990-1995 was even higher than the level attained in 2003.

The studies reported that thousands of workers in the Philippines and Indonesia lost their jobs as and when their employers lost their competitiveness and relocated to other countries, often to China, if they did not exit the market altogether. Big loss of jobs was disclosed particularly in textiles and garments and a number of other consumer products.

In Bandung alone, 67 textile/garment companies employing around 10,000 workers reportedly ceased operations in 2003, with many planning to relocate in other countries.

The story of the textile/garment industry is sad enough in Indonesia. It is even worse and indeed tragic in the Philippines. Textiles and garments used to be the country's top export earner and employer in the 1980s and early 1990s, providing jobs to around a million workers. Now it is a sunset industry with only a few companies surviving the onslaught of competition from other countries, especially China, which can produce and export at lower cost. The MFA termination is foreseen to wreak more havoc to the industry and to hammer the proverbial last nail into its coffin.

Loss of competitiveness as a production base for a particular industry in a particular country is of course not solely affected by binding trade liberalization measures such as those committed under AFTA. It is mainly affected by the relative cost of doing business in the country and the real or perceived economic and political conditions therein.

Clearly, jobs are lost and gained as markets are liberalized and comparative cost advantages shift across sectors in response to changes in market conditions. Jobs move from one industry to another as and when losers disappear and winners emerge from an increasingly open and competitive product and labor market.

The challenge for policy makers is to maximize the net gain or at least minimize the net loss of jobs, and how best to manage the movement of jobs and workers across sectors. In Vietnam, which is one of the countries covered in the studies, it was reported that there has been an overall net gain of jobs from trade liberalization although most of the jobs created were for unskilled and semi-skilled workers.

The writer is Senior Adviser, ASEAN-UNDP Partnership Facility. The views expressed herein are personal and do not necessarily reflect those of ASEAN, UNDP, or their respective member countries.